What is Entry and Exit Levels?
The two most commonly asked questions I get from new traders are, “when do I buy?” and “when do I sell?” These questions are synonymous to asking what entry (or “entrance”) and exit levels are. Entrance levels are the price that you enter (buy into) a cryptocurrency (or another commodity). Exit levels are the price that you exit (sell out of) an investment. The only exception to these definitions is during a short. If you “enter” a short it means you are selling, and when you “exit” a short it means you are buying. In essence, entering and exiting mean the same as buying and selling. “When do I buy?” and “when do I sell?” are the two most important questions in trading because it determines the percentage gain that you can potentially earn: the lower the entry and higher the exit, the higher the percentage gain!
How to Confidently Identify Good Entry and Exit Levels
There are many ways to decide when it is the best time to buy (or sell) into (or out of) a cryptocurrency. The more signals you have returning positively, the better the possibility of a good entry. Being literate with multiple entry strategies on a chart can help you with crafting a structured approach on how you can conduct a given investment or trade. A few different ways to establish entry levels are:
1. Support levels
2. Indicators
3. Fibonacci levels
4. Relative price and related cryptocurrency comparison
Support and resistance can provide a history based guide for entry levels and indicators can show you when an asset is overvalued or undervalued. Fibonacci Levels can teach you about common growth patterns, and relative price comparisons can teach you about related assets’ valuation. When combined, these various strategies can lead you to a successful low entry, or high sales point.
Support levels
Support levels are the most commonly referred way to find entry zones. Looking at historical price points (either bottoms or tops of candles/wicks) that are at the same level can help to determine when a price will reverse.
Looking at the graph below, we can see that the price fluctuates on the three horizontal lines drawn. This is because the price has touched the same price (as a low or high) multiple times. The more the price’s high or low touches a certain price that another high or low has already touched, the stronger the support level.
Indicators
Indicators are tools used to determine cryptocurrency valuation. Some tools use moving averages to determine price valuation, like the MACD. “MACD” stands for “moving average convergence divergence” and uses moving averages (which are trend-following price representations) to create a smooth, two-lined indicator that can be used in conjunction with other tools to analyses entry points.
When the MACD is high, it shows that the asset is “overbought”, meaning that the price rose too dramatically too quickly or is overvalued. When the MACD is low, it shows that the asset is “oversold”, meaning that the price has fallen too dramatically too quickly or is undervalued. Using low and high indicator levels, divergence, and crosses are all ways to use indicators to determine asset valuation. Every indicator is different, so make sure you understand your indicator before you use it, remembering that no indicator is a magic formula for future price movements.
So how can we use indicators to figure out a good entry point? The truth is that whichever indicator you choose on any timeframe will not be right 100% of the time. Using multiple indicators on multiple timeframes is the best way to identify good entry levels.
MACD turning upwards prompting a move up
Fibonacci Levels
Using Fibonacci levels can provide a trader with great information about where to enter or exit an investment. Fibonacci levels are created by taking the high point and low point in price of a trend, then dividing that range with key Fibonacci ratios of 23.6%, 38.2%, 50%, and 61.8%. Combining Fibonacci levels with a momentum indicator like MACD can prove to be particularly advantageous as you can read the momentum of a cryptocurrency and identify strategic support and resistance levels. The Fibonacci levels are fixed unlike more common indicators and allow for a trader to find support and resistance levels on the fly.
Fibonacci levels for Bitcoin in the past months. Observe price action bouncing between the support and resistance levels
Relative Price and Related Cryptocurrency Comparison
Cryptocurrencies always have a utility or purpose. It’s because of this nature of cryptocurrencies (and that many cryptocurrencies have the same purpose as others) that prices can be compared to each other (in relation to market capitalization). For example, one could look at two soft drink companies and compare the stock price keeping in mind the companies’ revenue, marketing, where they allocate company funds, etc. You can do the same things with cryptocurrencies, looking at privacy coins, supply chain tokens, medical tokens, etc. By looking at competing cryptocurrencies with a similar purpose you can identify correct levels. For example, if you look at NEO and ADA and their market capitalization, it makes sense that other ecosystem/utility cryptocurrencies have been growing as well to try to match them (like KMD and ICX).
While understanding how large a cryptocurrency can grow is a valuable tool, it is important to remember that not all cryptocurrencies are created equal. Cryptocurrencies with the same purpose will grow to different levels inevitably because of different technology, speed of development, marketing, user friendliness, etc. When taking all of these components into account, looking at relative valuation is a good indicator for what a cryptocurrency could be valued at (in terms of relative market capitalization).
Conclusion
Remember that you will almost never buy the absolute bottom, or sell the absolute top. The chances that you, or anyone, is able to exactly identify either the top or bottom is tiny given the variable nature of trading and investing. As a successful trader once said to me, “Buy at the knees and sell at the shoulders”, because trying to consistently buy the absolute bottom (the toes) is nearly impossible, as is trying to consistently sell at the absolute top (the head). Instead, if you focus on getting good entries that enable higher exits, you will be a successful trader. Remember that selling to make 20% is better than holding through, hoping on making 30%, and instead losing 20%. Identify your entry and exit points and hold strong, because while emotion clouds trading judgement, logic builds the best case for making a profitable turn on the market.